‘Optimally Vague’ contracts and their benefits to society

Imagine that you’re just about to sign an important contract – would you prefer it to have been precisely drafted, or would you be happy for it to be “optimally vague” ? Authors Nicola Gennaioli (Bocconi University and IGIER) and Giacomo A. M. Ponzetto (CREI, Pompeu Fabra University, IPEG and Barcelona GSE) suggest not only that vagueness in contracts is endemic, but also that there is an optimal level for vagueness. Deliberate vagueness in the correct amount, they say, can provide at least two long-term benefits for society in general*.

“First, the optimal contract is vague, even if courts are very imperfect. Second, the use of vague clauses is a public good: it promotes the evolution of precedents, so future contracts become more complete, incentives higher powered, and surplus larger. Third, as precedents evolve, vague contracts spread from sophisticated to unsophisticated parties, expanding market size.”

See: ‘Optimally Vague Contracts and the Law’, Centre for Economic Policy Research working paper DP10700, Revised January 2017. Previously circulated (July 2015) as: ‘Contract Innovation and Legal Evolution under Imperfect Enforcement’.

* Note: Although society-at-large might eventually benefit from the prevalence of optimally vague contracts, in the short term they could prove expensive for those closely involved – i.e. if caught up in costly legal proceedings over disagreements about the meaning of unclear clauses.

BONUS: The Marx Brothers discuss contractual arrangements. Begins at roughly 1:20, or thereabouts, approximately.

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